Apparel Retail: Catastrophe or Opportunity?

As those of you reading along know, I’ve been having trouble finding anything to get super excited about in this market. I like to buy things that are undervalued, and I just don’t see a lot of things that interest me. I’m mainly keeping an eye on companies that I like, waiting for the market to take a dive so I can swoop in with my large (percent wise) cash position and make out like a bandit. That’s the plan.

I’ve also been looking at companies that have not really participated in the recent good times on Wall Street. There are some parts of the market that have been downright horrible the past few months. I’ve been looking into clothing retailers, mainly department stores. I have a history in retail myself. I owned a large thrift store for nearly 10 years. Retail is a different animal than anything I’ve covered here on my blog before. Unfortunately, my little one shop operation doesn’t really give me a lot of insight on investing in large, publicly traded apparel companies. I never had to report same store sales to my (nonexistent) investors. I didn’t have to answer analyst questions on a quarterly conference call. What I did do was a lot of hard work. Which is also what I’ve been doing to get up to speed on investing in retail companies.

By now we’ve all heard about the ‘death of retail’. Amazon (NASDAQ: AMZN) is crushing traditional brick and mortar retailers. Malls are basically dead. People only go to stores to look at merchandise, maybe try it on, then order it (probably from Amazon) right from their smartphone before they get out the door. A lot of that is actually true, in my humble opinion. But I also believe that most forms of traditional retail are here to stay. And if that’s true, they are worth something.

Other than negative sentiment, I’m looking for safety. I’m generally looking for companies with stable balance sheets that pay nice dividends that aren’t going to be cut. One thing I’m learning is that most retail businesses don’t seem to keep a lot of cash on hand relative to their liabilities. That’s something that would usually bother me, but I guess that makes sense. Retailers use that cash to buy inventory, and rely on turning it for cashflow. So I’ll have to be a bit lax on that aspect of the balance sheet.

Another thing I’m looking for is an online presence to compete with Amazon. No small task, that. But EVERYONE has an online presence, so I’m looking for management that is taking it seriously.

One company that I’m interested in is DSW Inc. (NYSE: DSW), a shoe retailer. I’m already invested in Skechers (NYSE: SKX), which is a shoe retailer, but I consider them a shoe manufacturer first and foremost. Now before anyone gets the idea that I have some weird fascination with feet, let me tell you why I like the idea of a shoe retailer in this modern age. Who buys shoes online? Ok, a lot of people, my wife included. But, really? Unless I was going to order the EXACT same shoe from the same company, that I already knew fit, I would NEVER order a shoe online. I just can’t wrap my head around it. My wife probably gets around 50% of her shoes online, and has to return (or wants to but doesn’t because it’s too much of a hassle) about 1 in 4 of them. I honestly don’t understand that mindset, but whatever.

In early 2016 DSW bought Ebuys, an online footwear and accessories retailer. They offer hassle free returns at their 500 or so U.S. based DSW stores, as well as a successful ‘buy online, pickup at a store program’, which makes sense to me. Order online to get exactly what you want, go to the store to try it on, and if it isn’t what you want, BOOM, return it right there. And you happen to be in a shoe store, while you’re in the market for shoes… seems like a good idea to me. This company seems to have the online/brick and mortar thing figured out. They should complement and feed off of eachother.

DSW has had issues with same store sales lately, and they expect that problem to continue for the current quarter, though their revenues continue to grow. Their inventory numbers are also getting better, meaning they might not have to discount as aggressively going forward as they have in the recent past, which could mean better margins. The revenue growth seems to be coming from opening new stores, which I’m of 2 minds on. More stores is great if they work out, but right now closing stores seems to be in vogue for a lot of the bigger retailers, as we’ll see below. So it’s risky.

One thing I really like about DSW is the dividend, around 4%, and the fact that they’ve been buying back stock. The buybacks tell me that their dividend is pretty safe. Financially this company seems fine. While there are risks to the company’s strategy, I feel as though the negativity is overblown. I’m thinking of starting a position soon.

I’m also interested in Macy’s (NYSE: M). First of all, let me say that I REALLY dislike Macy’s. Pretty much every woman I’ve ever been involved with has dragged me through multiple Macy’s, multiple times. I’ve seen people accosted by perfume sprayers, and have often wondered how they can get away with that. Blatantly ridiculous, if you ask me. Macy’s is not my kind of shopping experience, but I’d be happy to make some money off the stock.

Macy’s has been experiencing sluggish sales and earnings the past few years, and has suffered from a disappointing holiday season. Same stores sales have been declining for seven straight quarters. The current big news is their plan to close 100 if its 870 stores, 68 of which have been identified. This of course involves the elimination of thousands of jobs. Macy’s will redirect effort and capital from these underperforming stores to better performing stores and their already successful online business.

Macy’s plans to open more Backstage stores (think discount) within existing stores, as well as BlueMercury beauty outlets. Another thing Macy’s has going for it is real estate ownership. Many investors are pushing for the company to spin-off the real estate holdings into a separate investment vehicle. The company has partnered with Brookfield Asset Management (NYSE: BAM) to look into their real estate options. I honestly don’t know if that is a good idea or not, but the fact that they own enough real estate for it to be an issue makes me feel good about the stock. Some of the locations that are closing will be sold, generating cash for the company.

Another good thing is that the stock offers around a 5% dividend that looks pretty safe, especially considering the upcoming real estate sales. There is also an ongoing stock buyback and talk about debt repurchases. Despite the company’s current problems, I don’t see any major financial issues cropping up.

2-2-17 UPDATE: The day after this post, I started a position in Macy’s at $28.84

I’m also keeping an eye on Kohl’s Corporation (NYSE: KSS). Much of what I’ve written about Macy’s is practically interchangeable with Kohl’s: similar stable dividend, nice buybacks, etc. Kohl’s doesn’t have the same real estate buzz, so the factors in play are different. Kohl’s is also closing stores, though not nearly as many as Macy’s. One thing I like about Kohl’s is their aggressive customer loyalty program. I’m more inclined to buy Macy’s at current prices, but KSS is one to watch.

There’s no question that traditional apparel retailers are up against a tech-savvy consumer with changing buying habits. Some won’t make the transition, some will. I believe that negative sentiment for the future of these 3 companies is overblown. Could it get more overblown? Sure. But I’ve listened to conference calls for each of them, and I don’t get any sense that these are doomed companies. All are relatively near points where I plan on starting to buy, but the key word here is ‘start’. I realize that they could continue to go down, at which point I will buy more. As with most of my purchases, my first buy is more or less 25% of a planned position; I’m giving myself room for more downside. I welcome it, in fact.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Do not take action in the market simply because of what you read here. I write about what I am doing and what I think, I am not advising anyone to do anything. Make your own decisions, do your own research, and never rely on any single source for information. Some of my ‘picks’ and strategies WILL lose money, that’s the way the market works. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada

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